360 DigiTech, Inc. (NASDAQ: QFIN) Q1 2021 earnings call dated May 27, 2021
Mandy Dong — Investor Relations Director
Haisheng Wu — Chief Executive Officer and Director
Alex Xu — Chief Financial Officer and Director
Ladies and gentlemen, thank you for standing by and welcome to the 360 DigiTech First Quarter 2021 Earnings Conference Call. Please also note, today’s event is being recorded.
At this time, I would like to turn the conference call over to Ms. Mandy Dong, IR Director. Please go ahead, Mandy.
Mandy Dong — Investor Relations Director
Thank you. Hello everyone, and welcome to our first quarter 2021 earnings conference call. Our results were issued earlier today and can be found on our IR website. Joining me today are Mr. Wu Haisheng, our CEO and Director; Mr. Alex Xu, our CFO and Director; Mr. Zheng Yan, our CRO.
Before we begin the prepared remarks, I’d like to remind you of the company’s safe harbor statement. Except for historical information, the materials discussed may contain forward-looking statements based on current plans, estimates, and projections, therefore you should not place undue reliance on them. Forward-looking statements involve inherent risk and uncertainty. We caution that a number of important factors could cause actual results to differ materially. For information about potential risks and uncertainties, please refer to the company’s SEC Filings. Also this call includes discussion of certain non-GAAP measures. Please refer to our earnings release for a reconciliation between non-GAAP and GAAP ones.
Last, unless otherwise stated, all figures mentioned are in RMB.
I will now turn the call over to Mr. Wu Haisheng, CEO of our company.
Haisheng Wu — Chief Executive Officer and Director
[Foreign Speech] Hello everyone. I am very happy to report that our quarter therefore exceeded our expectations across the board. The strong growth momentum that we have seen since 2020 Q2 continued in the first quarter and we had another set of a record-breaking operational results.
During the quarter, total loan facilitation was RMB74.1 billion, up 40% year-over-year. Outstanding loan balance increased by 38% year-over-year to RMB101.9 billion, exceeding RMB100 billion for the first time. Total revenue was RMB3.6 billion, up 13% year-over-year. Non-GAAP net income was RMB1.4 billion, up 452% year-over-year. As we execute on our various strategic initiatives and overall market demand continues to recover, we expect to maintain this robust growth momentum in 2021.
[Foreign Speech] While maintaining strong growth, we made significant progress in our technology-driven strategy of upgrading and transition. Loan facilitation under the cap-light model and other tech solution models exceeded 50% of total for the first time. This ratio increased further to 55% in recent months. This marks a fundamental change to the nature of our business. In addition, our tech empowered business line advanced on multiple fronts. Our smart marketing service product, Intelligence Credit Engine, ICE delivered rapid growth. In April, key monthly operating metrics of ICE such as users with approved credit line, transaction volume, and outstanding balance doubled from the 2020 year-end levels. In particular, the transaction volume in April went up by an impressive 200% from the 2020 year-end levels. Moreover, our risk management, our SaaS [Phonetic] product expanded rapidly. We have now established collaboration with 29 financial institutions under this model and with another nine in the pipeline.
[Foreign Speech] In terms of strategic growth drivers, we are very pleased to report remarkable progress in key initiatives such as embedded finance, API model, SME finance and the collaboration with Kincheng Bank of Tianjin, in-short, KCB. We believe we have successfully upgraded our core growth engines with more comprehensive and a diversified operations.
[Foreign Speech] Our embedded finance API model remains very popular among our business targets and connected with more chassis platform during the quarter. So far, we have established partnership with 20 leading traffic platforms and further diversified our customer acquisition channels. As of now, embedded finance model has already contributed over 35% of our new customer acquisition. V-pocket, our digital credit card products added around 1.14 million new merchants during the quarter with over RMB1.5 billion monthly transaction volume. This product continues to lift overall engagement level and the thickness of our customer base.
[Foreign Speech] We launched our SME finance business last year and the segment delivered a significant growth in Q1. Leveraging our risk management RM expertise in consumer finance, [Indecipherable] unique owner + SME pure core IM model. Under this model, SME is evaluated both at [Indecipherable] business enterprise. This substantially improved our risk management capability and the efficiency in SME lending. Most of our SME borrowers are engaged in retail, wholesale, hotel, F&B food and beverage and manufacturing.
In the first quarter, the total amount of new approved credit line in SME segment increased 67% on a sequential basis. In addition, our online and offline borrower acquisition channels expanded rapidly. So far, we have established a collaboration with 28 leading partners. [Indecipherable] SME platforms with the broadest channel coverage and our SME loan product quickly became one of the favorites among [Indecipherable]. Pricing of SME product is generally below 24% with better risk performance, longer tenure and the larger ticket size than consumer loans, which result in higher take rates around roughly 8%. With huge market potential, more supportive regulatory environment and attractive economic return, we believe SME presents a very promising opportunity for our long-term growth.
[Foreign Speech] Our collaboration with KCB centrally kicked off in the first quarter. Our deep-rooted strategic relationship has translated into strong business result. Within just a few months, total accumulated loan facilitation volume from KCB reached around RMB18 billion with a loan balance at around RMB13 billion. KCB now has become our largest partner in terms of volume, yet our strong strategic partnership is more than just the scale of the business. More importantly, this strategic partnership has boosted operational efficiency for both parties and in turn, such as showcase and help us to improve efficiency when we work with other financial institutions. We have seen positive demonstration effect that have led to notable improvements in our overall efficiency.
[Foreign Speech] We continued to improve funding efficiency and optimize asset quality. Our overall funding cost has been on a gradual downward trend over the last few quarters as we build more diversified funding sources. So far this year, we have issued a total of RMB2.1 billion ABS, ranking number four in the market with an average coupon rate of 5.6%. Key leading indicators of asset quality further improved and reached a new set of [Indecipherable] in our history. At this point, M1 collection rate increased to over 91% and day one delinquency rate dropped further to 4.9%, the best ever.
[Foreign Speech] Last, let me share as few thoughts regarding current regulatory environment. [Indecipherable] the guideline of the commercial banks’ online lending practice issued by CBIRC in July 2020 provided a basic regulatory framework for loan facilitation business, it has set some very specific [Indecipherable] examples of the loan facilitation model, we have always conducted our business in strict compliance with this framework. That is one of the reasons why our loan facilitation model is well accepted by almost 100 financial institution partners. We have a leader exposure in joint lending and student lending and stick to our role as a tech empowered loan facilitator. We also make sure we do not issue ABS over the leverage limit.
As you may know, we were among the 13 major FinTech Internet platforms that the regulator invited to meet recently. At the meeting, the regulator acknowledged the importance of our role in improving the efficiency of financial service providing service to our demand and reducing transaction cost. We believe the meeting was a necessary step to apply [Indecipherable] in the balance of the regulatory supervision to market participants and promote the healthy development of the platform economy. Strengthening supervision of the leading players will increase clarity to the regulatory direction of the industry, reduce regulatory overhead and promote a healthy and more consolidated market space.
Compared to the other fintech company ad meeting, our business models are relatively simple and straightforward. We have consistently held our operations to the highest compliance standards. Therefore, we are very confident we can meet new regulatory requirements applied to this industry. As the regulatory framework becomes more clear, we believe that leading fintech platforms like ourselves will embrace a historical era of growth.
[Foreign Speech] Overall, we are very excited that we are off to a very strong start in 2021. For the first time, loan balance topped over RMB100 billion and the capital-light model contributed more than half of our loan book. Our standard initiative delivered faster than expected results and there is more regulatory clarity about leading fintech platform. All of these give us full confidence for our development in 2021 and beyond.
[Foreign Speech] Now let me turn it over to our CFO, Alex to run through more detail info.
Alex Xu — Chief Financial Officer and Director
Okay. Thank you, Haisheng. Good morning and good evening everyone. Welcome to our quarterly earnings call. For the interest of time, I will not go over all the financial line items on the call. Please refer to our earnings release for the details.
As Haisheng mentioned, we had experienced robust consumers’ demand for credit along with further improvement in asset quality in Q1, as the Chinese economy continued on a steady upward trend and the Chinese New Year related seasonality was muted than normal.
Total net revenue for Q1 was RMB3.6 billion versus RMB3.34 billion in Q4 and RMB3.18 billion a year ago. Revenue from Credit Driven Services, capital heavy was RMB2.45 billion compared to RMB2.56 billion in Q4 and RMB2.81 billion a year ago. The sequential and year-on-year decline was in part due to the facilitation volume mix change as cap heavy contribution decreased significantly, although a recovery in average pricing offset some of the negative impact on a sequential basis.
During the quarter, average pricing was about 26.6% compared to 25.3% in Q4 and 28.2% a year ago. Going forward, we are expecting a relatively stable pricing environment throughout 2021. Revenue from platform service capital-light was RMB1.15 billion compared to RMB718 million in Q4 and RMB373 million a year ago. The robust growth was mainly driven by a 58% sequential growth in facilitation volume from cap-light and other technology solutions. While the underlying take rate for the platform service were relatively stable, we expect cap-light contribution percentage to continue to increase throughout 2021 and eventually account for a clear majority of our total volume by the year-end.
As macro-economic activities continued to recover in China, demand for Internet traffic also increased significantly along the way. As a result, we have experienced some uptick in sales and marketing expenses, average customer acquisition cost per user with approved credit line was RMB217 in Q1 compared to RMB198 in Q4. Meanwhile, we also noticed a clear pickup in customers’ drawdown activity during the quarter. As a result, we were able to maintain a stable and satisfied ROI despite increases in customer acquisition costs. We will continue to use lifecycle ROI as a key metric to determine the pace and scope of our customer acquisition strategy. For 2021, at this point in time, we believe current market conditions support a more proactive approach to accelerate the growth of our business.
Non-GAAP net income was RMB1.41 billion in Q1 versus RMB1.31 billion in Q4 and RMB255 million a year ago. We once again set a new record in quarterly profitability, driven by higher facilitation volume and noticeable improvement in asset quality. As we previously communicated to the market, with the transition to a more technology driven business model, the structure of our financial model has gradually changed. For Q1, we have seen significant improvement in operating margins as increasing contribution from cap-light and other technology solutions will generally lead to higher margin structure. We continue to expect the overall profitability growth to be more or less keep pace with the facilitation volume growth for 2021.
With strong operating results and increased contribution from capital-light model in Q1, our leverage ratio, which is defined as a risk bearing loan balance divided by shareholders’ equity further declined to 5.4 times from 6.6 times in Q4 and 9.5 times a year ago. We expect to see continued deleveraging in our business, driven by accelerating movement towards capital-light model and solid operating results. Meanwhile, our provision coverage ratio reached 554% in Q1 compared to 470% in Q4 and 401% a year ago. This was the highest provision coverage ratio in our corporate history, reflecting significant improvement in asset quality and our conservative approach in estimating provisions. However, as capital-light become a clear majority of our operations in the future and we are deeply in the safe zone in terms of the provision coverage, we believe these metrics become less relevant to reflect the nature of our business in the future.
Total cash and the cash equivalents increased to RMB9.2 billion in Q1 from RMB7.7 billion in Q4. Non-restricted cash was approximately RMB6 billion in Q1 versus RMB4.4 billion in Q4. A significant portion of our cash was allocated to security deposit with our institutional partners and registered capitals of different entities to support our daily operations. While we continue to generate strong cash flow through operation, we will also proactively deploy cash to expand our business, invest in key technologies and satisfied potential regulatory requirements. We believe that sufficient cash position will not only enable us to compete in this ever changing market, but also position us to capture potential growth opportunities in the market recovery.
Finally, let me give you some update about our outlook for 2021. While overall business trend has been stronger than we expected so far this year, we intend to keep our tradition of conservative approach in providing forward guidance. As such, for now we would like to maintain our 2021 total volume guidance of between RMB310 billion to RMB330 billion, representing year-on-year growth of 26% to 34%. Meanwhile, we expect total facilitation volume for Q2 should be in the range of RMB85 billion to RMB87 billion, representing 15% to 17% sequential growth. We will reevaluate full year guidance when we report our Q2 results. As always, this forecast reflects the Company’s current and the preliminary views which is subject to material changes.
With that, I would like to conclude our prepared remarks. Operator, we can now take some questions.
We are still processing the Q&A portion of the conference call. We will be updating it as soon as we analyze and process the con call. Stay tuned here for more updates.